Standing Committee B

[Sir Nicholas Winterton in the Chair]

Finance Bill

(Except Clauses 1, 4, 5, 9, 14, 22, 42, 56, 57, 124, 130 to 135, 138, 139, 148 and 184 and Schedules 5, 6, 19 and 25, and any new Clauses and Schedules tabled by Friday 9th May 2003 relating to excise duty on spirits or R&D tax credits for oil exploration.)

Nicholas Winterton: I welcome all members of the Committee to this sitting. Goodish progress is being made, and I hope that that will be continued. The friendly environment that exists across the Committee is to be commended.
 I believe that it has been indicated to you that there was a mistake on the provisional selection list issued yesterday. Clause 23 was listed in the wrong place. A new selection list has been produced, with clause 23 listed after clause 21 in accordance with the order of consideration. I hope that hon. Members in all parts of the Committee will take account of that.

George Howarth: On a point of order, Sir Nicholas. The Official Report for the morning sitting of the Committee on Thursday 15 May shows in col. 31 that I responded to an intervention from the hon. Member for East Carmarthen and Dinefwr (Adam Price), saying:
''Betting exchanges are not involved in that and because they do not participate in the levy, racing does not benefit from it in any way.''—[Official Report, Standing Committee B, 15 May 2003; c. 31.]
 I should point out that I was mistaken in that assertion, and that betting exchanges do participate in the levy. I should like to take this opportunity to correct that.

Nicholas Winterton: The hon. Gentleman has been courteous in drawing that matter to the Committee's attention. I know that his apology will be accepted and noted by the Committee. I think that that is the appropriate courtesy and I commend him on the action that he has taken.

Stephen O'Brien: On a point of order, Sir Nicholas. I seek your guidance. I note that on the provisional selection list, under clause 34, amendments Nos. 123 and 124 are listed to be taken, at your discretion, with amendment Nos. 131, 132 and 120, I dare say for the convenience of the Committee. For the sake of clarification, amendments Nos. 123 and 124 relate to clause 34, whereas amendments Nos. 131 and 132 relate to clause 35 and amendment No. 120 relates to clause 36.
 The arguments on amendments Nos. 131, 132 and, to a degree, 120 coincide, but the arguments on amendments Nos. 123 and 124 are different and distinct. Therefore, it might be worth considering whether it would be for the convenience of the Committee to contemplate taking amendments Nos. 131 and 132 on clause 35 and, likewise, amendment 
 No. 120 on clause 36, although we could discuss clauses 35 and 36 as a package.

Nicholas Winterton: I am grateful to the hon. Gentleman for drawing that matter to the Committee's attention. If it is his suggestion that the amendments that have been selected to be considered together should be split, I shall certainly give that some thought. If the hon. Gentleman and the Government are happy that they should be split, I am sure that that can be arranged. I am grateful to the hon. Gentleman.Clause 19 Face-value vouchers

Clause 19 - Face-value vouchers

Question proposed, That the clause stand part of the Bill.

John Healey: Members of the Committee will recall that in the 2002 Budget we set out an important package of measures to tackle VAT avoidance, and we have made strides since then in reforming the VAT system to prevent abuse and revenue leakage.
 As part of that package of measures we announced that, after consultation on the details, we would legislate at the earliest possible opportunity to stop revenue leaks resulting from loopholes in the VAT treatment of face-value vouchers. We do so now in clause 19. By face-value vouchers I mean vouchers, cards and the like that can be exchanged for goods and services, the most common examples of which are gift vouchers and telephone cards. 
 I can give the Committee a practical example of the problem. Under the old VAT rules, if the issuer of a voucher with a face value of £10 sold it to a retailer for £8, we would collect the VAT not on the £10 for which it was sold on to the customer but only on the £8 for which it was sold to the retailer. In effect, the retailer's mark-up of £2 was VAT-free. That loophole was also being used for avoidance purposes, because some businesses were selling face-value vouchers to associated companies at an artificially large discount. The vouchers were then sold on to customers at the full price, with the businesses having to account for VAT only on the original, small, discounted price. 
 As with other revenue leakage and avoidance, two concerns arise. First, the taxpayer has a right to expect us to collect all the VAT due on the purchase of goods and services; and secondly, businesses have the right to expect fair competition, instead of seeing other businesses gain an unfair advantage by artificially reducing their VAT bills. Therefore, we are legislating in clause 19 and schedule 1 to close that loophole. 
 Intermediate suppliers such as the retailer or the associated company in the examples that I have given will be required to account for VAT on the full amount for which they sell face-value vouchers on to their customers. Consumers will not have to pay more. A £10 voucher will still buy £10-worth of goods or services. 
 It may be helpful if I draw the Committee's attention to two specific aspects. First, the clause includes a provision to tackle the specific avoidance scheme whereby a voucher is provided alongside other 
 goods or services to reduce the taxable value of the sale. Secondly, I want to reassure the Committee that the VAT-free status of certain goods and services has not been altered by the changes. Postage stamps, for instance, are unaffected. We have also ensured that, if vouchers are exchanged for zero-rated goods such as books, the VAT liability of those vouchers may be adjusted accordingly. 
 The changes follow the original Budget 2002 announcement and the consultation with affected businesses that followed. In the technical operation we aim to ensure that the benefits of the changes are proportionate to the costs that they impose on the businesses. I believe that the changes are proportionate and further show our commitment to tackling revenue losses in the VAT system. I therefore commend the clause to the Committee.

Stephen O'Brien: I thank the Minister for setting out the background to the clause, with which he will note that schedule 1 is coupled. I was proposing to take the amendments to schedule 1 separately, if that is called, but I am happy to take them together, if that is your wish, Sir Nicholas.
The Chairman indicated assent.

Stephen O'Brien: I am clearly being encouraged to proceed with the amendments to schedule 1. The stand part debate on clause 19 will be wrapped up into my discussion of the amendments to schedule 1.
 This is a complicated subject, with quite a history. As the Economic Secretary says, a company such as Marks & Spencer may sell a gift voucher to a customer for £10 with a face value of £10. However, members of the Committee will be aware that it sometimes sells such vouchers at a discount to another business, which will then sell them on at the face-value price or even give them away. For example, M&S might sell to the intermediary business a £10 gift voucher for £9. I dare say that we have all had offers through the post in which an M&S voucher is part of the deal if we are tempted by the products or services on offer in the envelope—never a wise move. 
 Under the old law, M&S had no VAT charge when it issued the voucher. When the voucher was redeemed for £10-worth of goods or services, M&S would be liable to VAT on only the amount for which it had sold the voucher. Therefore, it would be only £9 if the voucher had been sold for £9. The intermediary's profit of £1 escaped VAT. I am sure that the Economic Secretary will correct me if that analysis is erroneous, but I believe that that is how the scheme has worked. 
 Some businesses—presumably not M&S—were abusing the system by issuing vouchers to an associated intermediary at a big discount; for example, selling a £10 voucher for £6. The intermediary would sell it on for £10 to an ultimate recipient, who would use it to acquire goods or services worth £10, but VAT was only ever collected on £6. 
 As the Economic Secretary said, Customs and Excise issued a consultation paper entitled ''Modernising the VAT Treatment of Face Value 
 Vouchers'' in June 2002, which ventilated various ways in which the problem might be tackled. I hope that the question of what changes were made to the Government's original proposals as a result of the consultation will not be contentious, not least because it appears that there may be some technical difficulties, which I shall discuss as I now come on to specific amendments to address the problems that I have identified. It is important to understand where the Government started and where they ended up as a result of consultation. 
 The Government have chosen not to levy VAT on the issuer at the time of issue. I shall call the issuer party A. We may keep M&S in mind, but I would not want it to feel that I was touting it, particularly as it has announced better recovering profits this morning. The intermediary, or party B, must pay VAT on the £10 when it sells the voucher on, and party A would be liable to VAT on £6 when the voucher is redeemed—so far, so clear. That is achieved by paragraphs 4 and 6 of new schedule 10A, which will be added to the Value Added Tax Act 1994 by schedule 1 of the Bill. 
 Of course, that would be overkill, because Customs would collect VAT on £16. The missing piece of the jigsaw is that party B is meant to be able to deduct input VAT as if—those two words are very important—party A's sale of the voucher to it were standard rated. Such a provision is not in the Bill at present, although presumably the Government intend to introduce it. By that, I pray in aid paragraph 5 of VAT information sheet 03/03 entitled ''What is the position with regard to input tax recovery?'', which was published at the time of the Budget. It states: 
''Intermediate suppliers will be entitled to recover input tax, subject to the normal requirements. The liability of the sale is deemed''
 —hence, the importance of the phrase ''as if'' that I used earlier— 
''to equate to the underlying supply of goods or services. If it is known that the FVV''
 —the face-value voucher— 
''has been redeemed for zero-rated goods or services then the intermediate supplier can make an adjustment to both the output tax and the input tax to reflect the liability of the final supply. Adjustments can be based on retail scheme percentages or other overarching calculations rather than tracking individual FVV.''
 Note 5 of the document goes on to say: 
''Where an intermediate supplier is purchasing an FVV from the issuer who takes on the obligation to accept it, and is not required to account for VAT until the FVV is redeemed, the intermediate supplier may treat the amount of VAT that will be due on the supply as their input tax at the time the purchase is made.''
 Finally, note 5 says: 
''It is suggested that the issuer should produce an invoice to facilitate an intermediate purchaser's input tax recovery. However, to ensure the issuer does not account for output tax on this invoice (because issuers who undertake to redeem the voucher do not have to account for VAT until the voucher is redeemed) it is suggested that the invoice is annotated with the following wording, 'the issuer of the voucher will account for output tax under the face value voucher provisions introduced in Budget 2003'.''
 The best way to tackle the problem seems to be to ensure that that wording appears in the Bill—which will become statute if the Government get their way—through amendment No. 89. That amendment 
 specifically addresses that point, giving intent to what the Government have set out in their information sheet: that VAT is levied on £10 and £6. Importantly, amendment No. 89 also enables recovery of VAT on the £6. The legislation would therefore give the necessary clarity and a demonstration in law of what is already in note 5 of the VAT information sheet. 
 Such a measure is supported not only by the Chartered Institute of Taxation but in more direct terms by the Institute of Indirect Tax and the Institute of Chartered Accountants in England and Wales. The Institute of Indirect Tax put it in slightly more blunt terms, saying: 
''This is another instance of Customs seeking to collect tax from an innocent third party where they cannot collect it from the person who actually owes it. Paragraphs 3(3) and 4(4) of the new Schedule 10A, introduced by Schedule 1, hold the issuer of a voucher—such as a record token or a phone card—or any intermediate purchaser, liable for payment of the VAT on the supply of the goods or services made by a third party against the voucher.''
 Although that institute has identified the problem, it has not identified a solution, which is what amendment No. 89 is intended to do. 
 The Institute of Chartered Accountants in England and Wales says: 
''We believe that the proposed treatment of face-value vouchers in new Schedule 10A ,VATA 1994 is not appropriate. This is because it fails to recognise the true nature of such vouchers as a means of payment for goods or services which are VAT-exempt. The proposals are also likely to impose an unfair liability by requiring the issuer of such vouchers to bear any tax not accounted for by some other person supplying goods or services paid for by their use. This could well be outside the issuer's control''.
 The Institute of Chartered Accountants then makes the point that that 
''may be an infringement of human rights.''
 Finally, it adds: 
''The proposals are likely also to result in more tax being collected than is properly due. In many cases where vouchers are used to obtain goods or services chargeable at the zero or lower rate of VAT the proposals will result in tax being due at the standard rate on vouchers supplied through intermediaries. This would appear to breach the fundamental principle of VAT that the tax collected in relation to a particular supply of goods or services should be proportionate to the value of that supply.''
 The Minister referred to the Government's view that they are proposing a proportionate position. Clearly that is disputed by those whom the Government sought to consult. That is why I earlier put a question about the changes in what the Government originally proposed and the adjustment made in the light of that consultation. That is an important part of the argument. 
 Amendment No. 90 relates to another matter arising under clause 19 and schedule 1. Organisations such as Book Tokens Ltd., which have a central issuer that is not a retailer so cannot itself redeem the vouchers, are catered for by paragraph 3 of new schedule 10A. There is essentially no change to the present law. However, certain types of voucher—Marks & Spencer vouchers are presumably an example—may be redeemed for a zero-rated item, such as food. Such a situation is catered for by paragraph 6 of new schedule 10A. If the situation arises, there is retrospective adjustment to B's position. However, implementing the practice could be quite 
 tiresome if A and B were independent parties, which certainly challenges what the Economic Secretary said in his opening remarks about introducing measures that were ''proportionate to the costs'' to businesses. If A and B were independent parties, the practice would be burdensome. 
 A flaw in the new provisions is that they could upset existing contractual arrangements. Amendment No. 90 relates to that point. Under paragraph 4 of schedule 1, the new law applies only to vouchers issued on or after 9 April 2003. However, party B, the intermediary, might, before that date, have entered into a contract with party A to buy vouchers in the future for fixed prices. In such a case, B will find that instead of making a profit of £1 when he buys a voucher for £9 and sells it for £10, he will make a profit of 85p after meeting the VAT on the £1. That is why an amendment should provide that, where the parties are independent, the new law does not apply to vouchers issued pursuant to contracts made before 9 April. 
 Those are the explanations for what I hope are perceived as carefully considered and constructive amendments. Together with those who help and advise me, I arrived at the amendments as a result of many representations, some of which criticised the clause in robust terms. Recognising the Government's arguments, I have tried to find a genuine technical solution and achieve the necessary clarification and balancing of the issues. I hope that the Government will accept the amendments.

Nicholas Winterton: I have to say to the hon. Gentleman that they cannot do that at this moment, because the amendments will be dealt with in a subsequent debate. The Question before us is whether clause 19 should stand part of the Bill. I have allowed the Opposition spokesman to make considerable reference to amendments that relate to schedule 1, but if the Opposition want to vote on those amendments, they will have to wait until the relevant stage. I must say that when we move to schedule 1, I trust that only brief reference will be made to the amendments that I have allowed to be covered under clause 19.

David Laws: We understand entirely the concerns that have induced the Government to introduce the proposals in the clause and schedule 1. The Economic Secretary clearly set out the case for taking action. We understand that, under the existing legislation, tax losses arose in some circumstances when intermediate suppliers sold face-value vouchers. It therefore seems sensible of the Government to introduce measures to tackle that. However, we share many of the concerns set out by the hon. Member for Eddisbury (Mr. O'Brien), and we support the amendments, which we will debate in greater detail later.
 As the hon. Gentleman mentioned, there seems to be a certain overlap between the debate on clause 19 and the debates that we had the other day on clauses 17 and 18. Given the lack of time, I do not want to put us into reverse and revisit those debates. As the hon. Gentleman mentioned when he cited the comment of 
 the Institute of Indirect Taxation, this is another instance of Customs possibly seeking to collect tax from an innocent third party when it cannot collect it from the person who actually owes it. The Economic Secretary will be aware that the Chartered Institute of Taxation, the Institute of Chartered Accountants and the Institute of Indirect Taxation have expressed several concerns about the clause. The hon. Member for Eddisbury set out those concerns clearly, and I will not go over the ground that he covered. The Chartered Institute of Taxation questions whether the Government's measures are consonant with the sixth VAT directive. I would be grateful if the Economic Secretary indicated whether he thinks that the measures are consonant with that directive and whether he received specific advice on the point. 
 More broadly, the Institute of Chartered Accountants sums up the major criticism of the clause when it raises the issue of fairness. It states: 
''The proposals are also likely to impose an unfair liability by requiring the issuer of such vouchers to bear any tax not accounted for by some other person'',
 and that takes us back to our debates on clauses 17 and 18. 
 The hon. Member for Eddisbury also discussed the substantive issue of fairness in relation to face-value vouchers, which are used in payment for a wide variety of goods on which VAT levels may be varied—zero or lower rate VAT or standard rate VAT. There is concern about whether the way in which the Government intend to deal with the issue will breach the fundamental principle of VAT, which is that the tax collected in relation to a particular supply of goods or services should be proportionate to the value of that supply. 
 The hon. Member for Eddisbury has introduced some fairly sensible proposals and amendments. We hope that the Economic Secretary can respond to them.

Jonathan Djanogly: I congratulate my hon. Friend the Member for Eddisbury on his clear explanation of the problem. Although double taxation should obviously be avoided, given that an issuer does not charge VAT on the supply of face-value vouchers to an intermediary, it is difficult to find a legal basis for an input tax deduction by an intermediary. It is questionable whether VAT charged on the supply of goods and services should be regarded as an input tax of the intermediary who purchased the face-value vouchers. I therefore support amendment No. 89, which would address that situation.
 It is worth noting that the Chartered Institute of Taxation considered it ''extraordinary'' that such important matters—input tax deduction and invoicing—will be dealt with on an extra-statutory basis. It suggests that both input tax deduction and invoicing should be dealt with in statute, and I agree.

John Baron: I shall briefly concentrate on two issues, both of which have been touched on, but both of which bear dwelling on. The
 first relates to the unfairness of the scheme and the second its practical implications.
 On unfairness, the clause is another instance of Customs and Excise seeking to collect tax from an innocent third party when it cannot collect it from the person who owes it. Paragraphs 3(3) and 4(4) of schedule 10A to the Value Added Tax Act 1994, which is introduced by schedule 1, hold the issuer of a voucher, such as a record token or a phone card, or any intermediate purchaser liable to pay the VAT on the supply of goods or services made by a third party against the voucher. Several Members have discussed that issue, which is clear. The provision is unreasonable if the failure to account for the tax is outside the issuer's control or influence. I ask the Economic Secretary to give that some thought because it will have practical implications for the commercial world. 
 I shall dwell for a second on the practical difficulties of the clause, and I would welcome the Economic Secretary's thoughts on them. Practical difficulties arise in connection with the charge to tax under paragraph 6(5) of new schedule 10A in respect of the face-value vouchers specified in paragraphs 4(4) and 6(2). It is important that the consideration for the supply is apportioned on a fair and reasonable basis between exempt, zero-rated, reduced-rated and standard-rated elements. 
 Such a fair and reasonable basis would reflect the sales mix of the persons who eventually redeem the vouchers for goods or services, and it should take into account any difference in the mix of cash sales and voucher exchange sales. It is unclear from the clause how the person supplying the voucher is supposed to arrive at even an approximation of the mix, and I would welcome some explanation from the Economic Secretary as to how the clause would deal with that issue.

Michael Jack: I rise briefly to support the comments that have been made and to pay tribute to my hon. Friend the Member for Eddisbury on the way that he introduced our views. I, too, am concerned that the proper level of VAT be collected for those who have a liability. Once again we seem, as the hon. Member for Yeovil (Mr. Laws) suggested, to be replicating the line of argument that we had on for clauses 17 and 18. In that case, the Economic Secretary was able to demonstrate some real-world examples of where such fraud had been perpetrated, from the fields of telecommunications, computers and chips. However, so far the Economic Secretary has given us a theoretical construct with no practical examples.
 I am concerned about how the measure will work where one has face-value vouchers. How would it work, for example, if the Virgin group, which has interests in zero-rated services such as transport and full VAT services such as selling music CDs, were to do a deal with the Kellogg's company and put vouchers on the back of Corn Flakes packets which could be redeemed against any products sold by the Virgin group? Will the Economic Secretary tell us whether that problem exists in other parts of the European Union covered by the sixth VAT directive? If it does, how is it dealt with abroad? If not, why does 
 the United Kingdom appear to be unique as far as that problem is concerned?

John Healey: I explained the purpose of clause 19 in my earlier remarks. This is no trivial issue. Hon. Members have talked about a sense of proportion. The total revenue loss this year is estimated through a combination of leakage and avoidance to be around £105 million.

Michael Jack: To put the £105 million in perspective, will the Economic Secretary tell us how much VAT is collected in those areas where the proper rate has been paid?

John Healey: I was not seeking to make a point about the proportion, but the total revenue lost from VAT as a direct result of the existing loophole in legislation, which clause 19 and the associated schedule will plug.
 As with other forms of revenue leakage and avoidance, the concerns that I have explained are twofold. First, the taxpayer has a right to expect the Government to collect what is due on the purchase of goods and services. Secondly, business has a right to expect that we shall prevent others from gaining an unfair advantage by reducing their tax and VAT bills. The Opposition amendments to schedule 1 reflect genuine concerns that have been expressed in some quarters. They were well argued and are well intentioned, but they are ultimately unnecessary and, to a degree, misguided. 
 Amendment No. 89 would specify that an intermediate supplier is entitled to claim input tax on the supply of vouchers to him by an issuer who redeems the voucher. I assure the hon. Member for Eddisbury and other hon. Members that that is our intention. Intermediate suppliers of face-value vouchers are already entitled to reclaim VAT paid on the purchase of the vouchers, and it is unnecessary to complicate the legislation further. 
 The hon. Member for Eddisbury suggested that that might be overkill and asked whether a second party can reclaim VAT. The answer is yes. It is not overkill because the second party will sell the voucher for more than it was purchased for. That will have the effect that we intend of being able to tax appropriately the mark-up on the transaction.

Jonathan Djanogly: The Minister keeps referring to our amendments being unnecessary. Our intention is to elaborate on what the Minister proposes to clarify and to react so that there is less chance of further upset and avoidance.

John Healey: I entirely accept that that may be part of the reason, and it is a proper reason for debate in Standing Committee. I do not want the hon. Gentleman to misunderstand me. I am not discouraging him from tabling or speaking to such amendments or properly probing me as the Minister responsible for this part of the Bill.
 Amendment No. 90 would delay the effects of the new legislation, but the change was well trailed during the consultation process, which began last June. Nevertheless, I recognise that some businesses are 
 experiencing difficulties with the transition to the new arrangements, and Customs and Excise is working with the firms affected to help them through that. We aim to publish detailed guidance by the end of May.

Michael Jack: In the light of that helpful observation, may I ask the Minister if he will undertake to write to the bodies that have made representations to the Committee explaining his position, so that, even at this late stage, they may have the chance further to consider his views and, if necessary, to comment before the Bill is enacted?

John Healey: I am confident that the businesses affected are already in close contact with Customs and Excise officials, but I shall be happy to arrange for our officials to ensure that those who are affected have a copy of our proceedings in which they will be able to read the points made by the right hon. Gentleman and his hon. Friends and any points that I make in response. I hope that that covers the point that he is concerned about.
 On the specific concerns of the hon. Member for Eddisbury, although amendment No. 90 seeks to address the loss of VAT through increased opportunity for avoidance during the period of delay, avoidance is not the only source of revenue loss to the public purse. VAT to the order of £30 million will be lost through leakage on legitimate sales of vouchers during that period. That revenue would have to be found from elsewhere. 
 The hon. Gentleman asked about the consultation period dating back to the original announcement in the pre-Budget report 2001 and the confirmation of our plans in the 2002 Budget. The consultation has helped us to refine our thinking considerably, as we have gone along. The main change is to move from seeing sales by intermediate suppliers as a standard-rated sale of goods to a supply of services. That is important, because it give intermediary sales the flexibility to reflect zero-rated supplies—for books, for instance. 
 It is worth reminding the Committee of the genesis of the clause and schedule. There was an announcement in the pre-Budget report of 2001 and confirmation in the Budget of 2002 that we would consult businesses that could be affected, a consultation paper was issued in June 2002 running through to the end of October 2002, and on Budget day 2003 an information sheet, to which the hon. Member for Eddisbury has referred, was published alongside a summary of responses to the consultation. In addition, as a result of detailed discussions between Customs officers and many businesses and representative organisations, detailed guidance is in the pipeline, and we aim to publish it by the end of this month.

Jonathan Djanogly: The Economic Secretary has referred to the consultation that the Government have undertaken in respect of the proposed changes. Why did he not mention and analyse the consultation in his opening remarks? Did issues emerge from it that he does not want to address? It seems strange.

John Healey: In my opening remarks, I gave an explanation that I felt was succinct and helpful to the
 Committee. I am elaborating on it now in response to points raised genuinely and properly by Opposition Members. I hope that that combination and the sum total of our discussions will adequately deal with the points that the hon. Gentleman and others may be concerned about.
 The hon. Member for Eddisbury asked about the issuing of a VAT invoice to an intermediate supplier and the question of annotation. I confirm that we will need to issue a VAT invoice to the intermediate supplier when supplying face-value vouchers to them. If they wish, issuers can annotate those invoices to avoid confusing other VAT accounting procedures. In other words, the annotation is purely a suggestion to aid the identification of invoices. It is not compulsory. 
 The hon. Members for Yeovil and for Billericay (Mr. Baron) were worried about the collection of tax from innocent third parties, and the hon. Member for Huntingdon (Mr. Djanogly) urged me to give the matter further thought. We are giving it careful thought in the production of the more detailed guidance. The arrangements that we propose are intended to simplify accounting procedures and guard against tax avoidance schemes. Customs will publish a statement of practice detailing when VAT would be collected from the third party. There is no intention to collect from anyone VAT that is not due from them. 
 Concerns were also raised about another party's liability. Such a liability will arise only in the event of identified tax avoidance, where a trader deliberately sets up another company to supply goods or services and that company has no intention of accounting for VAT on the amount that it receives from the initial supplier of the voucher. 
 The hon. Member for Huntingdon asked about the use of extra-statutory concessions in implementing the provisions. Extra-statutory concessions are not required. What will be required is an agreement of the procedures to be used by the business and its appointed Customs officer, which is normal in VAT assurance work, as he will know. That happens in many other cases, such as partial exemption agreements and retail schemes.

John Baron: Will the Economic Secretary elaborate on an earlier point? The fact remains that Customs and Excise will be seeking to collect tax from a potentially innocent third party where it cannot collect it from the person who actually owes it. I did not detect anything in the Economic Secretary's remarks to contradict that. Will he elaborate on that unfair aspect?

John Healey: I have tried to explain why we do not believe that that is unfair and that we will look to collect tax only where it is due.
 On the question of comparative regimes in other European Union states, raised by the right hon. Member for Fylde (Mr. Jack), the majority of other member states account for tax on the sale of the voucher. They do not permit the cash-flow advantage currently found in the UK, where VAT is accounted 
 for only on use. The right hon. Gentleman may be encouraged to hear that the European Commission has not come to a definitive view on the correct treatment of vouchers beyond the fact that tax must be collected. 
 That leads me to the point raised by the hon. Member for Yeovil on consistency with the sixth directive. As he would expect, this measure has been fully cleared through the Council. It is entirely consistent with the sixth directive. Specifically, it complies with article 2 of the first directive, which states that tax is due on what the consumer pays. There is no infringement of the Human Rights Act 1998 as this measure collects VAT, as I have said, only where it is due. 
 I recognise and welcome the understanding that the hon. Members for Yeovil and for Eddisbury have displayed of the concerns that lie behind the clause. I am glad that they accept, by implication, that measures are needed to tackle such tax losses. On the basis of my explanation, I hope that they will reconsider and agree not to press the amendment. Otherwise, I shall ask my hon. Friends to reject it and support the clause as it stands.

Stephen O'Brien: I am grateful to the Economic Secretary for having taken the time to address the difficulties that we have identified. I believe that Committee members are as one in agreeing that any revenue loss amounting to £105 million is a serious matter. None of us seeks to prevent the Revenue from being able to collect its due revenue in a proper manner. It is therefore right to say—I note that the hon. Member for Yeovil also said this—that both sides of the Committee more than imply that these measures are necessary; they say explicitly that they are required.
 One part of the Economic Secretary's response to our amendments was interesting. It is of some comfort that the representations made by the industry in the consultation have meant that sales by intermediaries have been moved from the standard rating for the supply of goods to that for the supply of services, thus enabling flexibility, but that has not directly dealt with the difficulty that resulted in our moving amendment No. 89.

Nicholas Winterton: Order. I must say that the hon. Gentleman has not moved amendment No. 89; that will come later when we debate schedule 1.

Stephen O'Brien: I am most grateful to you for ensuring that I keep on the technical straight and narrow in terms of procedure, Sir Nicholas. As you are Chairman of the Procedure Committee, I would expect no less.
 Amendment No. 89, which it is clear that I shall move, is well intended. I have listened carefully to what the Economic Secretary had to say. He said that it is not the Government's intent to collect VAT from anyone where it is not due, given that the annotation cited in paragraph 5 of the note from the VAT information sheet 03/03 is not compulsory. The clear intent, which both the representations that we have received and our own analysis suggest is right, is set out in paragraph 5, and there seems to be no countervailing argument to convince me why it 
 should not appear in the Bill. Therefore, I shall in due course urge my colleagues to press amendment No. 89 to a vote. 
 As far as amendment No. 90 is concerned, I was interested to note that the Economic Secretary thought that the amendment would result in a loss of £30 million. If that were to prove to be true, we would not want to be party to it. Following the points ably put by my right hon. Friend the Member for Fylde on whether the Economic Secretary should write to all the bodies and institutes who have given advice, I would certainly urge him to do so. 
 The Economic Secretary claims that all the businesses that may be affected are already in touch with Customs and Excise. Given that contracts are in train, there may be some who would be affected, however much consultation took place in earlier months. That should be advertised widely, and we need the Economic Secretary's assurance that that will be properly and thoroughly addressed. On the basis that I hope that the Economic Secretary will be able to give that reassurance, I would not press amendment No. 90. At this stage, however, I have not been convinced that we should not press amendment No. 89 to a vote. 
 Question put and agreed to. 
 Clause 19 ordered to stand part of the Bill.

Schedule 1 - VAT: Face-value vouchers

Stephen O'Brien: I beg to move amendment No. 89, in
schedule 1, page 142, line 7, at end insert— 
 '(6) Where— 
 (a) a person who is not its issuer makes a supply of a facevalue voucher, 
 (b) that supply is chargeable by virtue of the previous provisions of this paragraph and is not an exempt supply by virtue of those provisions, and 
 (c) the consideration given by him for the voucher is by virtue of paragraph 4(2) not chargeable or not on its full amount, 
 that person shall be treated for the purposes of this Act as if the consideration given by him for the supply to him of the voucher, insofar as that consideration was not actually chargeable, included tax at the relevant rate.'.

Nicholas Winterton: With this it will be convenient to discuss the following:
 Amendment No. 90, in 
schedule 1, page 143, line 1, leave out paragraph 4 and insert— 
 '4(1) Subject to subparagraph (2), the amendments made by this Schedule apply to supplies of tokens, stamps or vouchers issued on or after 9th April 2003. 
 (2) The amendments made by this Schedule shall not apply to the supply of any token, stamp or voucher issued pursuant to a contract made before 9th April 2003 between the issuer and the person to whom he issues it, unless those persons were on 8th April 2003 connected with each other within the meaning of section 839 of the Income and Corporation Taxes Act 1988.'. 
It may well be that the Opposition spokesman wishes to speak to the amendment, but I shall permit very few remarks if he feels that that is necessary, because he has dealt with both the amendments at some length under clause 19. [Interruption.] I do not 
 want applause from the Government; it creates grave embarrassment for the Chair.

Stephen O'Brien: I intended merely to move the amendment formally.

Nicholas Winterton: That is the first time that my advice has been taken.
 Question put, That the amendment be made:—
The Committee divided: Ayes 10, Noes 17.

Question accordingly negatived. 
 The Chairman being of the opinion that the principle of the schedule and any matters arising thereon had been adequately discussed in the course of debate on the amendments proposed thereto, forthwith put the Question, pursuant to Standing Orders Nos. 68 and 89, That this schedule be the First schedule to the Bill:— 
 Question agreed to. 
 Schedule 1 agreed to.

Clause 20 - Supplies arising from prior grant of fee simple

Question proposed, That the clause stand part of the Bill.

John Healey: Members of the Committee will recall that the last Budget contained an important package of measures to deal with VAT fraud and avoidance. They will also be aware of some of the strides that we have since made in reinforcing the VAT system against abuse and revenue leakage. In the 2002 pre-Budget report, we announced immediate action to tackle a highly threatening avoidance scheme involving the sale of new freehold commercial buildings. It may help if I outline the background of the scheme and, therefore, of clause 20.
 Normally, the supply of commercial land and buildings is exempt from VAT. However, the European Union's sixth VAT directive specifically deems the supply of new commercial buildings to be taxable, and in the UK we have traditionally taken the definition of new building to be one that is sold within three years of its construction. 
 VAT is usually due on the sale of a commercial building at the time of legal completion. However, in some circumstances, the final selling price is not known at that point, which can cause complications 
 in determining the VAT liability of the sale. Therefore, a trade facilitation measure was introduced in 1993 that allowed VAT to be declared at the time payment was received rather than at the legal date of the sale. 
 Regrettably, as unfortunately often happens, a measure introduced to help the majority of businesses has been undermined by a minority of businesses and their tax advisers, who saw it as an opportunity to exploit the rules and to avoid tax. They contrived to ensure that the final selling price on the new building remained uncertain. They then ensured that the bulk of the payment was made after three years, when the VAT liability of the building automatically changed from taxable to exempt. 
 Therefore, we took action to block such avoidance schemes in last November's pre-Budget report by amending the secondary legislation that governs the VAT treatment of commercial buildings with effect from 28 November 2002 in order to block future avoidance schemes and safeguard some £165 million that we estimated would be at risk each year if the scheme went unchallenged. In clause 20, we are taking the opportunity to strengthen and simplify anti-avoidance legislation. We are taking steps to ensure that it does not impose undue burdens on businesses that are not engaged in avoidance. 
 The clause provides that on sales of new commercial properties made on or after Budget day, the liability of payments made after three years will remain taxable and standard rated. In other words, all the uncertain payments for the freehold of a new building will be taxable if the freehold was granted on or after Budget day. Like the changes introduced in the pre-Budget report, the clause will also block avoidance involving the sale of vacant land and the subsequent construction of a commercial building. Deferred payments for the freehold of bare land will be exempt, subject, of course, to the option to tax, even if a new building is later constructed on the land. 
 As a consequence of the clause, the changes to the VAT regulations made at the time of the pre-Budget report will be considerably simplified and made less burdensome for non-avoiders. A separate statutory instrument was laid on Budget day to amend the regulations to do just that.

David Laws: Can the Economic Secretary give us some indication or confirmation of the economic effects of clause 20 on Exchequer revenues in each of the next few years?

John Healey: I have explained to the Committee that we took steps to block the avoidance scheme in the pre-Budget report. At that stage, we had recourse only to secondary legislation, which we laid. We estimate that the revenue at risk from future avoidance schemes is £165 million a year. Clause 20 puts the powers in primary legislation. That allows us to simplify them and to take away some of the burdens for non-avoidance, which we implemented because we had to use the second-best, but nevertheless immediate, instrument of secondary legislation. The
 clause is a further demonstration of our commitment to tackling VAT avoidance in a well-targeted way.

Stephen O'Brien: Clause 20 relates to the time of supply of land transactions. The Economic Secretary has explained the clause thoroughly. Basic VAT law—for the record, paragraph 1(a) of schedule 9 to the Value Added Tax Act 1994—states that the sale of a freehold new building or new civil engineering work must be standard rated, regardless of whether the seller has elected it. However, by entering into sale contracts where payment of the price was delayed, sellers of new buildings or works could take advantage of section 96(10A) of the 1994 Act and VAT regulation 84(2) in its original form, which delayed the time of supply until payment of the price and made the sale exempt. That provision has been used in VAT avoidance and was partially dealt with by a statutory instrument in November 2002, which amended VAT regulation 84(2).
 By inserting new section 96(10B), clause 20 lays down a general rule that if at the date of the grant—in other words, completion—the building or the work is new, the price will always be standard rated, even if payment is delayed. Having considered the Minister's explanation carefully, I regard the clause as reasonably sensible. 
 Question put and agreed to. 
 Clause 20 ordered to stand part of the Bill.

Clause 21 - Business gifts

John Healey: This is a small and simple measure, but it will be none the less welcome to many businesses and to members of the Committee. The Committee will know that firms from across the country routinely offer gifts to visitors, clients, partners and, on some occasions, visiting MPs in furtherance of their business. Such business gifts have traditionally qualified for VAT relief provided that their value does not exceed a prescribed limited and that they are given to an individual only once in a 12-month period. In Budget 2001, we increased the limit on the value of gifts qualifying for relief from £15 to £50.
 There is, however, an anomaly in the rules. If a business gives a succession of gifts to the same person, the gifts are subject to VAT even if their total value over a 12-month period does not exceed the £50 limit. The clause replaces the current qualifying criteria with a provision that any number of business gifts made to the same person in a 12-month period will qualify for relief where the total cost does not exceed £50. The clause is small, simple and sensible, and I commend it to the Committee.

Stephen O'Brien: The Economic Secretary has said that the clause is small and simple. On delving a little further, however, we find that it raises some issues, which I hope that he will consider carefully and respond to. He will note that no amendments have been tabled because we are raising these points to catch his eye, and the eyes of his advisers. He may want to tackle the difficulties that we have identified on Report. If he chooses not to do so, we reserve the right further to consider the clause.
 I will not rehearse what clause 21 is intended to achieve, and none of us would dispute its intent or principle, which the Economic Secretary has outlined. The problem is that Customs and Excise might be too rigid in examining what constitutes ''the same year''. Two annual gifts such as those given at Christmas might be given in consecutive years but within a little less than 12 months of each other. The sums may be small, but, for a small business giving a lot of Christmas gifts to clients and sales staff, the cost might be an unwelcome added burden. 
 I have identified a hassle factor. When one examines a provision that has been described as relatively easy and simple, it is important to consider whether true simplification has been achieved. I recognise that there is no compulsion to conduct a regulatory impact assessment, which I dare say the Economic Secretary did not consider in relation to this relatively small matter. However, the clause may well add an unnecessary and disproportionate burden to small businesses, which need to ensure that their commercial relationships and staff relationships are well cemented. 
 I hope that the Economic Secretary will carefully examine the idea of allowing businesses to choose a 12-month period, or to use a 12-month period determined in law, such as the VAT year, the accounting year or the period to 31 December. I also hope that he will consider bringing the matter back on Report. The problem was identified by the Institute of Chartered Accountants, which states: 
''We welcome the intention to simply these rules. However, by introducing any period of one year in which a succession of business gifts can be aggregated means that businesses will have to keep rolling 12-month records, thus reducing much of the effect of the simplification. We would suggest that either businesses be permitted to choose a 12-month period, or that one should be determined by law'',
 which reinforces my point. 
 The key is to recognise that rolling periods are worse because all companies must have them. If such records were kept, they would impact on those businesses that have already identified the ''same year''. It would be better to have a single date rather than bringing businesses into line by using a rolling period, because businesses dealing with the regulatory burden can anchor to a single date.

Rob Marris: Does the hon. Gentleman agree that the calendar year would be the simplest system for everybody?

Stephen O'Brien: At first blush, the calendar year would be the simplest system, but for administrative reasons—and therefore to reduce the regulatory burden—there may be a better way of picking the ''same year''. Personally, I would take the hon. Gentleman's suggestion, but I am raising the matter to tease out the issues. It is a Parkinson's law issue, because although the provision looks small, the hassle factor could be severe.
 Another issue has been raised with me and it may have been raised with other Opposition parties. The Charities' Tax Reform Group has come up with a significant point, which I urge the Minister seriously to 
 consider in order to make the necessary clarification and adjustment on Report. Like all of us, charities say that simplification and clarification are desirable, but there is a problem: 
''Although it was clearly not the Government's intention to target charities by introducing this measure,''
 the Charities' Tax Reform Group is 
''concerned that charities may inadvertently be affected by it. This is because, under Schedule 4, paragraph 5 of the 1984 VAT Act, the making of a succession of gifts by a taxpayer to the same person is a deemed supply. This can be beneficial to charities (and other not for profit organisations) in that they distribute zero-rated literature to their supporters/contacts to keep them updated on developments within the charity.
Where this activity is not a taxable supply in its own right, (eg a formal subscription to a membership organisation) the activity is a deemed supply at the zero rate. The consequence of this is an ability to recover a proportion of the VAT incurred on related costs.''
 It goes on to say: 
''Clause 21 would remove from the deemed supply any succession of gifts where the cost to the provider''—
 that is the charity— 
''of the gifts is less than £50 in any given 12-month period.''
 It continues: 
''As it is very unlikely that any charity will spend anything near £50 a year on newsletters for their supporters, this proposed change will prevent the charity being able to treat the activity as a deemed taxable supply. Consequently, the charity will lose the ability to recover the input tax associated with supplying the newsletter—adding yet more irrecoverable VAT to the £500 million that charities pay each year.''
 It then goes on to cite at some length—I will not take up the Committee's time by putting it on the record—the technical adviser, Peter Jenkins from Ernst and Young. He has gone through the provisions in great detail. The Charities' Tax Reform Group has reasonably and responsibly said: 
''If this clause goes ahead, we are concerned that Customs might not accept the technical interpretation that we outline above. We should therefore be most grateful if Ministers could confirm that it was not the intention to affect the present arrangements and that the status quo could continue for charities, ie they can continue to treat the supply of the newsletters as a deemed supply and recover a proportion of input tax on related costs.''
 It goes on to say, which is why I believe it is a very constructive representation: 
''Such a ministerial assurance would help clarify matters and prevent charities having to enter into detailed technical negotiations with Customs and Excise.''
 I am sure that all Committee members would regard that as a sensible and appropriate approach. If any adjustment is to be made, I hope that the Economic Secretary will reflect on those points and make adjustments on Report. If that is not the case, we reserve the right to try and do the same.

Norman Lamb: We have received the same representations from the Charities' Tax Reform Group, and we share the concerns outlined by the hon. Member for Eddisbury. It seems that a simple solution to the problem would be for the Economic Secretary to confirm that it is not the intention of the clause adversely to affect charities in the tax treatment of literature such as newsletters that they distribute to members.
 Perhaps the Economic Secretary would also advise charities how they can make it clear through their own literature that people will receive the newsletter in return for donation to the charity so that the matter is given consideration. As I understand the briefing, that would take it outside the definition of a business gift. The matter could be simply clarified by the Economic Secretary making it clear that charities will not be adversely affected and the status quo will continue. 
 My other quick point, which was also referred to by the hon. Member for Eddisbury, is that I would be grateful if the Economic Secretary would deal with the concern that the effect of the clause could be that businesses will have to keep rolling 12-month records, which will increase the regulatory burden on them and reduce the beneficial impact of the clause.

Jonathan Djanogly: I agree with my hon. Friend the Member for Eddisbury. It is disappointing that the Government are not taking the opportunity to simplify the situation. The rolling period will mean that the red tape that will need to be processed in order to comply with the clause will be processed at many different times. The Economic Secretary made the point that we are talking about small amounts, but regular processing of small amounts is relatively cost-inefficient. My hon. Friend made an important point that should be addressed; a fixed, 12-month period would be far simpler to administer.

John Healey: In relation to representations that I have received from the Charities' Tax Reform Group, I shall examine those concerns to check whether there is an unintended impact, or any consequences for charities in the way that the hon. Members for Eddisbury and for North Norfolk (Norman Lamb) have outlined.
 On the question of the 12-month period, which was raised by the hon. Members for North Norfolk, for Eddisbury and for Huntingdon, it is right that the Bill provides for a rolling 12-month period. By concession, businesses will be able to adopt any suitable 12-month period, such as a calendar or tax year, but they will be able to pick the period with the least hassle factor for them, to use the term of the hon. Member for Eddisbury. The decision is down to businesses. Businesses will then have to demonstrate that the £50 limit is not exceeded in any 12-month period. 
 In relation to the hon. Gentleman's first point about Christmas gifts, a company could choose to define its 12-month rolling period appropriately if it were concerned about the Christmas period and could give gifts on 25 December in one year and 24 December in the next. Therefore, they can choose both their 12-month period and when they make the gifts to staff. I believe that it is the simplest and most flexible way and best suits the needs of different businesses. 
 Concerns have been expressed about the possible increase in compliance costs. Any increase in record keeping is likely to be minimal. Businesses must already monitor whether they are making a series or succession of gifts and must keep records on the value 
 of some business gifts for the Inland Revenue. Therefore, the change merely extends record keeping minimally and should not involve a significant increase in costs. On that basis, I hope that all members of the Committee will support the clause. 
 Question put and agreed to. 
 Clause 21 ordered to stand part of the Bill.

Clause 23 - Supply of electronic services in member States: special accounting scheme

Nicholas Winterton: The question is that clause 23 stand part of the Bill.
Mr. O'Brien rose—

Nicholas Winterton: The hon. Gentleman is a little late.
 Question proposed, That the clause stand part of the Bill.

Stephen O'Brien: I am most grateful to you, Sir Nicholas. I shall clearly have to jump out of my seat more energetically. I thought that a little eye contact would do the trick, but that is clearly not so in your case. I must remember that, as both of us come from Cheshire constituencies, I shall have to smile harder at you.
 Clause 23 and schedule 2 relate to the supply of electronic services in member states and the special accounting scheme and are part of a series of changes pursuant on the EU VAT on e-commerce directive 2002/38/EC, which deals with VAT on international e-commerce. This particular change relates to the position of a non-EU business that provides interactive services over the internet to buyers in the EU, without having any place of business in the EU itself—shades of our previous debate on betting online. Up to now such a business could avoid European Union VAT on its sales. It must now register and pay VAT on sales to private customers in the EU. However, it needs to register in only one EU member state, which can be any member state that it chooses. 
 As we are discussing clause 23 stand part, I have taken the opportunity to lay out the introduction. The amendments relate to schedule 2, which inserts schedule 3B to the VAT Act 1994 into the Bill, and provide for a person to register in the United Kingdom. All other EU countries are meant to be introducing corresponding provisions. The schedule is interesting from a technical point of view, as the business will create output VAT. 
 As this is a stand part debate, I have taken the opportunity to lay out the introduction. The amendments relate to the schedule, which I understand will be taken later. Unless you immediately give me guidance, Sir Nicholas, that you would like to combine them, I shall sit down now and discuss the amendments as part of the schedule after the stand part debate. As the schedule relates to the clause, I wanted to make it clear that I had amendments, as it might affect our view on the stand part debate.

Nicholas Winterton: May I help the hon. Gentleman? If he chooses to raise these matters now, clearly, as I previously told the Committee, I shall not want a repeat performance when we reach schedule 2. In view of the advice that I gave previously, I am happy for the hon. Gentleman to raise those matters now if he believes that that is the best way to present his case.

Stephen O'Brien: I am grateful, Sir Nicholas. I want to follow the correct procedure, but it would be sensible to discuss schedules with their relevant clauses. Whether that will be the theme as we discuss the Bill is for you and others to decide.
 The schedule is technically interesting in that output VAT is at the UK rate on supplies to customers in the UK, but on supplies to customers elsewhere in the EU, the rate will be that in the customers' countries. Customs and Excise will collect output VAT, but pay it to another country. That seems straightforward, and it was as a result of representations from the Chartered Institute of Taxation that we tabled amendments Nos. 91 and 92 to schedule 2. I shall move them at the appropriate time, but will debate them now for the convenience of the Committee following your guidance, Sir Nicholas. 
 The Chartered Institute of Taxation believes that the text of paragraph 14(4) of new schedule 3B to the Value Added Tax Act 1994: 
''Records must be made available electronically under sub-paragraph (3) above'',
 should state: 
''Records under sub-paragraph (3) above must be made available electronically.''
 That may seem a minor change, but it would be helpful in clarifying and tidying up the drafting. The Committee is taking up the time of right hon. and hon. Members to try to ensure that the legislation is as good as possible, irrespective of whether we agree with it. In this case, we have no difficulties with the principles concerned. 
 On amendment No. 92, paragraph 22(7) of new schedule 3B to the Value Added Tax Act 1994 does not identify the UK provision giving effect to article 4(2) of the 13th directive. All Committee members will have latched on to that point and have it in the forefront of their minds. The Institute of Taxation states that it appears to be regulation 190 of the VAT regulations 1995, SI 1995/2518. That is a minor but important omission, which should be tidied up, and I simply seek the Minister's undertaking that if he is not minded to accept our amendments, he will return on Report with amendments to give proper legislative effect to them. If he cannot give such an undertaking, we shall have to register our displeasure when the amendment is moved formally.

John Healey: I shall follow your guidance, Sir Nicholas, and the lead given by the hon. Member for Eddisbury. I shall briefly explain the clause, the schedule and my view on the two amendments.
 The Committee may recall that last year my right hon. Friend the Chancellor successfully concluded negotiations with other European states within the 
 European Union on a new VAT directive for e-commerce. My right hon. Friend the Paymaster General played an important role in that agreement. 
 At present, e-services supplied by EU firms to non-EU customers are subject to VAT. My hon. Friend the Member for Wolverhampton, South-West (Rob Marris) is looking puzzled, so I shall repeat that for his benefit. At present, e-services supplied by EU firms to non-EU customers are subject to VAT. Those supplied by non-EU firms to EU customers are free of VAT. That anomaly, as my hon. Friend will appreciate immediately, undermines the competitiveness of UK firms and firms in other European Union states. The new agreement has at its heart a UK proposal to level the playing field between EU and non-EU businesses by introducing, by 2006, a comprehensive electronic system to enable EU consumers to be charged VAT at the rate applicable where they live and whoever the supplier may be. In the interim, non-EU businesses providing e-services will, from 1 July 2003, will be required, for the first time, to charge VAT on all the supplies that they make to EU customers. That requirement, which the hon. Member for Eddisbury touched on, would mean that non-EU businesses would be obliged to register and account for VAT in every EU member state where their customers resided. However, clause 23 and schedule 2 introduce a simplified optional scheme to allow such businesses to register electronically in a single member state of their choice and to declare electronically the European Union tax due on a single VAT return to that member state. The member state of registration will then distribute the VAT to the appropriate EU member states. As I have explained, the scheme is expected to be replaced by July 2006 by the comprehensive electronic system for both EU and non-EU businesses. 
 As far as I can see, amendment No. 91 would merely alter the structure of the sentence in page 149, line 26, and appears to be principally a matter of style and taste that adds nothing substantive to the clause. If our drafting is unclear or could be misconstrued, I should be prepared to make such a change, but I do not feel that the hon. Gentleman has made that clear or pressed that point hard enough for me to accept the amendment. 
 Amendment No. 92 seeks to add an incorrect and unnecessary cross-reference to a VAT regulation. It is incorrect because regulation 190 implements article 4(1), not article 4(2) of the 1986 VAT refund directive—which is directive 86/560, the 13th VAT directive. It is unnecessary because article 4(2), which allows member states to apply extra restrictions to non-EU businesses that they do not place on their own businesses, has not been implemented in the United Kingdom. I hope that, on that basis, the hon. Member for Eddisbury will agree not to move the amendments. If he does not, I shall have to ask my hon. Friends to resist them.

Stephen O'Brien: In the light of the Economic Secretary's response, for which I am grateful, and in particular of his highlighting of the detail of amendment No. 92, I shall, at the appropriate moment, seek leave to withdraw that amendment.

Nicholas Winterton: The hon. Gentleman has not yet moved amendment No. 92. As it will be taken with amendment No. 91—with which it will be convenient to consider amendment No. 92—he will not have to withdraw it. We will come to those two amendments when we move on to schedule 2. I hope that the hon. Gentleman appreciates what I am saying and understands the very important procedures of Committee.

Stephen O'Brien: In the light of your advice, Sir Nicholas, I shall wait until we get to the amendments. For the Committee's convenience, I was simply trying to flag up where we were coming from, but we will get to that shortly.
 Question put and agreed to. 
 Clause 23 ordered to stand part of the Bill.

Schedule 2 - Supply of electronic services in member States: VAT special accounting scheme

Question proposed, That this schedule be the Second schedule to the Bill.

Stephen O'Brien: Were amendment No. 92 the lead amendment, I should not have moved it. The Economic Secretary said that he would look carefully to see if there is any need for a change in wording such as that proposed in amendment No. 91. Further representations may be made on that, and he will have time to consider those before Report. For that reason, I have not moved amendment No. 91.

Rob Marris: I am trying to make my remarks at the right place in the batting order, which the hon. Member for Eddisbury seems to be finding difficult today. I was slightly puzzled when the Economic Secretary said that services that are supplied by companies within the EU to companies outside the EU are subject to VAT but not vice versa. I cannot see in schedule 2 that the reverse is taken into account for countries such as Canada, which has the equivalent of VAT in its goods and services tax. Will not there be double taxation under the scheme?

John Healey: We have a double taxation treaty that adequately covers that situation.
 Question put and agreed to. 
 Schedule 2 agreed to.

Clause 24 - Introductory

Question proposed, That the clause stand part of the Bill.

John Healey: The clause determines the scope of civil penalties for those who fail to keep their obligations under national and EU Customs laws or who evade certain types of Customs duties or import VAT. It also defines key terms for this part of the Bill, which includes clauses through to clause 41. The date at which the changes will come into operation will be set out in a Treasury order to be laid in the autumn.
 Civil penalties are being introduced to encourage businesses to comply better with their legal 
 obligations. They will help to create fairer competition for all importers and exporters by specifically targeting non-compliant businesses that, by cutting corners, can gain a competitive advantage over businesses that fully meet their legal obligations. 
 At present, most infringements of Customs laws are classified as criminal offences. Many are relatively minor and are not penalised because to do so by way of criminal prosecution would be disproportionate and a poor use of court and Customs time. Introducing civil penalties will allow a more appropriate response to many breaches of the law and will provide a necessary sanction against non-compliant businesses that have hitherto been able to ignore the rules, largely without fear of punishment. 
 Customs already operates similar civil regimes for domestic VAT and excise. It is difficult to come by data, but I believe that the significant data that we have from the operation of VAT give an indication of the potential effect of this set of clauses and this reform. Prior to the introduction of a civil sanction, only 68 per cent. of declarations and payments of domestic VAT were received on time. With the introduction of a default surcharge, the compliance rate immediately jumped to 77 per cent. and has continued to rise to its current level of 87 per cent. 
 There will be two types of penalty under the Bill. The evasion penalty will be used as an alternative to prosecution in less serious cases of evasion. However, it is not a substitute for prosecution. Businesses or individuals who evade or try to evade duties or taxes will continue to be penalised either through a civil evasion penalty or, if appropriate, through criminal prosecution. Let me make it clear that the Government are not going soft on evaders or criminals. Customs civil penalties will not apply to prohibited and restricted goods such as drugs and firearms, or goods liable to excise duty, such as cigarettes and alcohol. The current sanctions applied to those infringements will remain. The introduction of a civil evasion penalty for evasion of Customs duties will enable Customs to investigate and deal with more cases of fraud because of to the streamlined procedures that apply. 
 A second penalty is being introduced to deal with general non-compliance where evasion is not involved. It will be used in cases of failure to comply with legal requirements and obligations, such as a business that makes persistent errors in import declarations. The aim is to encourage compliance by those who currently fail to discharge their obligations correctly. In targeting the non-compliant, Customs will help to ensure that already compliant businesses are not placed at a commercial disadvantage by non-compliant competitors. 
 In developing the proposals, we have worked closely with a sub-group of the joint Customs consultative committee for well over a year. That group comprises interested parties from throughout the international trade sector, representing agents, importers, exporters, freight forwarders and representatives from the Law Society and the Confederation of British Industry. Throughout the 
 process, they have been supportive of the introduction of a civil penalty regime. They view the introduction of penalties as a long overdue, necessary measure to level the playing field for compliant operators and to remove the disproportionate—albeit increasingly remote—threat of prosecution for very minor contraventions of the law. 
 The hon. Member for Eddisbury will appreciate that the trade is naturally concerned about how the regime will operate in practice. Therefore, we have exposed drafts of the legislation and our own internal guidance to the group. We have listened to its concerns and, where appropriate, taken suggestions on board. We continue to liaise and consult on some aspects of the regime. I am committed to exposing draft secondary legislation to the trade during the summer before finalising its structure. I also propose to expose our training programme to the trade through the group to ensure that the right messages are being transmitted to our operational staff. With those comments, and the reassertion that the introduction of civil penalties as a new regime and a reform has broad support from the trade, I commend the clause to the Committee.

Stephen O'Brien: I thank the Minister for laying out a helpful introduction to clauses 24 to 41, which is appropriate as clause 24 is the introductory clause of part 3. That has helped to clarify several points, and it is particularly helpful to have a report on how the consultation process has been engaged.
 As was described, the general background to the clause, and the others in part 3, is the wish to bring civil penalties for the evasion of Customs duties as an alternative to criminal sanctions. My party regards it as sensible to approve of a step that provides for civil penalties to increase compliance with the rules rather than leaving criminal sanctions as the only option. That sets the scene for where we are coming from in relation to clauses 24 to 41. Notwithstanding the welcome for the civil regime, the test that I have applied in preparation for the debate is how the clause shifts the burden on the taxpayer. Has the burden been shifted in such a way as to be onerous in a way that raises questions or cannot be sustained? We have tested the possible fairness or the burden of the provision. 
 The Institute of Chartered Accountants in England and Wales is well aware of the problems faced by Customs and Excise in the management and control of certain movements of goods, and it understands the logic behind the introduction of the provisions. It is concerned about the way in which the clauses have been drafted and about whether the proposals meet the requirements of human rights legislation. To that end, we need to explore some of the issues. I note that the frontispiece of the Bill states: 
''Mr. Chancellor of the Exchequer has made the following statement under . . . the Human Rights Act 1998:
In my view the provisions of the Finance Bill are compatible with the Convention rights.''
 Clearly, that is an important and serious statement. Parliament has every right to rely on it—that is how it is intended. 
 The institute raised the matter as a potential issue and we have focused some of our concerns on it. I hope that during the debate on this and following clauses we can establish whether the institute's concerns are genuinely well founded. The Minister might need to reflect on a number of points.

Norman Lamb: It was pointed out to me earlier that I inadvertently addressed you incorrectly, Sir Nicholas. May I take this opportunity to apologise?
 Briefly, I share the concerns raised by the hon. Member for Eddisbury. I received the same briefing from the Institute of Chartered Accountants in England and Wales. Although it seems a sensible reform to introduce the civil remedies, the institute expressed concern that the absence of due process with a civil remedy could give rise to numerous appeals, which could result in the setting aside of the penalty, thereby potentially reducing the efficacy of the civil remedies. I should be grateful if the Minister would deal in his response with the concern that the system could be clogged up because of the process of appeals, as well as with concerns about human rights. If due process is denied, a person could end up paying a penalty that is effectively criminal in its proportions, but that person would not have the protections that citizens have when faced with a criminal charge.

John Healey: I am grateful to the hon. Member for Eddisbury for his general approach in saying that the reform is sensible. Both he and the hon. Member for North Norfolk raised the question, which they had been briefed on, of whether the measure conforms with human rights legislation. Our view, and the view of parliamentary counsel, is that it does. Cases of evasion through dishonesty, which are dealt with under clause 25, are classified as criminal charges under the European convention on human rights. That classification entitles the taxpayer to the safeguards provided for in article 6(2) and (3) of the convention. It does not make the case a criminal case in UK law, however, and the Police and Criminal Evidence Act 1984 does not automatically apply. The procedures to be adopted when investigating cases under clause 25 are being modelled on those used in the VAT civil evasion penalty regime, which have been found by the independent VAT and duties tribunal to be human rights compliant.
 On safeguards in what it is important to remember is a civil, not a criminal regime, under our set of proposals, when liability to penalty is first established, except when over £10,000 in duty has been undeclared, action will always be confined to a warning letter advising of the contravention and informing the taxpayer that future performance will be formally monitored over two years. Should similar contraventions occur during that period, a penalty may be imposed. As a further safeguard, the decision to issue a warning letter can be appealed about to a tribunal. 
 I hope that members of the Committee will accept the clause. 
 Question put and agreed to. 
 Clause 24 ordered to stand part of the Bill.

Clause 25 - Penalty for evasion

Question proposed, That the clause stand part of the Bill.

Nicholas Winterton: Before we begin the debate and further to the point of order raised by the hon. Member for Eddisbury on clauses 34 and 35 and the amendments to them, the Chair is happy for amendments Nos. 123 and 124 to be discussed with clause 34 and amendments Nos. 131, 132 and 120 to be discussed with clause 35. I hope that that meets the wishes of the Committee.
 I understand through the usual channels that the Committee is likely to sit until around 7.30 pm today. If yesterday's happenings in the House are a guide, we shall probably have several Divisions on the Floor of the House on the third day of the Criminal Justice Bill. I suggest to the Committee that it might be sensible to try to combine a tea break for Committee members—and particularly for Ministers, Opposition spokesmen and the Chair, a comfort break—with a Division if one occurs around 5 o'clock and that we have a short break of, perhaps, half an hour then. I shall make an announcement at the time, but thought it might be helpful for the Committee to have some indication of that now.

Stephen O'Brien: I acknowledge with gratitude the approach that has been taken on clauses 34 and 35 with their attendant amendments. I dare say that I speak on behalf of all Committee members in thanking you, Sir Nicholas, for giving us guidance on the rest of today's business and particularly the timing of both tea and comfort. I am grateful to you for helping the Committee.
 Turning to clause 25, the concept of dishonesty in evasion is retained, although there may be a question about the burden of proof because there is no need for the conduct in question to give rise to any criminal liability. The Minister's response on clause 24, and particularly his response to the hon. Member for North Norfolk, was helpful. The argument strayed into clause 25 and the hon. Gentleman has obviously received representations, as I have, about its application in relation to human rights and, therefore, the Police and Criminal Evidence Act 1984. 
 The Minister set out clearly the reasons for the possibility that the 1984 Act does not automatically apply in such cases. That went some way to alleviate some of the issues that have been raised in representations to us about clause 25. As a result of this short debate, the Minister will be able to add to that. The concern was that there might be an absence of due process. We were not minded to table amendments to the clause, but I await the Minister's response, although his response to clause 24 went a long way to assist me.

Michael Jack: Could the Minister put my mind at rest about the way in which clause 25 will operate for someone who unwittingly evades a requirement to pay tax when that is subsequently discovered following inspection and discussion with a representative of Customs and Excise and when they had not knowingly
 set out to be dishonest? For those of us who have to deal with constituency cases in which constituents with small businesses run into problems over VAT, some words of reassurance would be helpful. Perhaps that is dealt with through the type of procedure that he described in clause 24, where letters of notice and warning are issued, but I should be grateful for some clarification.

Stephen O'Brien: My right hon. Friend raises an interesting point. I hope that the Economic Secretary will confirm that the concept of dishonesty is retained in the clause. There should have to be an element of intent combined with some knowledge.

Michael Jack: I entirely agree with my hon. Friend's line of inquiry. We look forward to hearing what the Economic Secretary has to say.

John Healey: The hon. Member for Eddisbury probed the burden of proof, which is an appropriate and important line of questioning because we are looking to introduce a civil rather than a criminal regime. As he knows, comparing the two regimes, criminal cases must always be proved beyond all reasonable doubt whereas civil cases require proof to a lower level, known as the balance of probabilities. Although that is a lower level than proof beyond reasonable doubt, the more serious the allegation, the higher the level of proof must be. Thus, for civil evasion cases the level of proof required by the courts and VAT tribunals begins to approach the criminal standard, although it is still below it, whereas the level of proof required to demonstrate liability for default surcharge, for example, is lower.
 The right hon. Member for Fylde is rightly concerned about the position of businesses that trade honestly and make unwitting errors, as he described them. The Government recognise that even the best-run businesses make occasional mistakes, and penalties will not automatically be issued in such cases. In addition, the new penalties are part of a much wider programme that Customs is putting in place to ensure that the changes are implemented smoothly and to improve compliance across the board. Those include a visiting programme to provide advice and support for new traders who wish to improve their general compliance; improvements in the way in which existing guidance is updated and made available; and the publication of compliance standards. Those standards will be published through the joint consultative committee, a body made up of a wide range of trade and other interests with a direct concern in this field, as I explained earlier. 
 On that basis, I hope that all Committee members will accept the clause. 
 Question put and agreed to. 
 Clause 25 ordered to stand part of the Bill.

Clause 26 - Penalty for contravention of relevant rule

Stephen O'Brien: I beg to move amendment No. 125, in
clause 26, page 22, line 3, leave out subsection (3)
 The amendment is linked to clause 25, which introduces civil penalties for evasion of import and export duties. Clause 26 contains a compliance rule, which carries a penalty for transgressions—subject to the concept of a reasonable excuse, which is a limited concept in VAT terms—and for the breach of certain rules and requirements in circumstances other than evasion. 
 My approach to clause 26 is twofold. First, I seek clarification of the part to which the amendment does not relate. I suspect that we will therefore find ourselves having a stand part debate and I hope that that is what you will rule, Sir Nicholas, for the convenience of the Committee. My point, which comes from the Institute of Chartered Accountants in England and Wales, is that although the maximum penalty for contravention is £2,500, it is not clear whether that is an absolute penalty for a given series of breaches or the maximum that could apply to each breach. If 20 invoices covered the import of a consignment of the same goods, all destined for different customers, and there was a common breach, would the fine be £2,500 or £50,000? 
 If the maximum fine was limited to £2,500, that would not be a criminal matter. On the other hand, if the fine was £50,000, any enforcement procedures would have to follow the Police and Criminal Evidence Act 1984. Given the answers that the Economic Secretary has already given on this part, and his reference to the position under article 6(2) of the European convention on human rights, a question arises of whether PACE would apply. The example used to express the ICAEW's concern might be debateable, but the fundamental point about the maximum fine is important and we seek clarification. 
 My second point relates to the amendment. The problem that I have identified and highlighted through it centres on the understanding of the phrase ''without further qualification'' in subsection (3). Does it mean that Customs and Excise does not have to give reasons for designating someone a prescribed person? If so, it might be difficult for the person concerned to argue against the designation. My recommended solution to the problem is simply to delete subsection (3). We believe that it is wrong for Customs to be able to name any person under that rule—a point that can be generally understood in terms of the fair and appropriate balance of justice. Instead, Customs should be required to show that an individual falls within a designated category. 
 Under the current provision, a person could have no knowledge of why they were being designated a prescribed person, and no redress. We regard that as a penalty and it is of concern to all our constituents who potentially could be in that situation. Customs and Excise is being given too wide a power. The power proposed by the Government in the clause could ultimately allow Customs to prevent someone from arguing whether they should be a prescribed person, because it could simply include them by name without giving an explanation or reason. 
 I hope that the Economic Secretary will consider the matter in the serious way in which it has been put, and that he will accept the amendment.

Jonathan Djanogly: Subsection (3) is an enabling power. I though that the outline given in subsection (1) would be sufficient, but I then had a closer look at the wording. In the definitions, ''prescribed'' is defined as meaning specified in or determined in accordance with the regulations made by the Treasury. That leads me to ask the Economic Secretary a few questions.
 When the definition refers to the regulations made by the Treasury, does that mean that the Treasury must bring those regulations to the House for approval, or can it make them up as it goes along? Is subsection (3) intended to get around the need to bring regulations to the House by allowing the Treasury to do what it wants, even if it must bring regulations to the House on other occasions? The provisions seem to be circular and I wonder whether subsection (3) is a way of getting round subsection (1).

John Baron: I, too, have one or two concerns about the clause's infringement of civil liberties. Clauses 25 and 26 will make it easier for Customs and Excise to take action against individuals evading customs duties or import VAT. The introduction of civil penalties will bring the customs regime into line with other regimes administered by Her Majesty's Customs and Excise such as VAT, where civil penalties have been used to improve compliance. In general, it seems sensible to approve of a step that provides for civil penalties to increase compliance with the rules rather than to leave criminal sanctions as the only option. In that respect, the Government's move is welcome. However, I have one or two concerns and I would appreciate it if the Economic Secretary were to address them.
 I seek an assurance that the move to civil penalties will not be detrimental to an individual's civil liberties. For example, my hon. Friend the Member for Eddisbury has already mentioned the important phrase ''without further qualification''. It means that Customs and Excise does not have to give reasons for designating someone a ''prescribed person'', which has all sorts of ramifications. Under the current provisions, a person could have no knowledge of why they were being designated as such and would therefore have no redress. 
 The amendment is designed to prevent Customs and Excise imposing a penalty simply by naming any person as falling within the description ''liable to a penalty''. That is important, because the power could prevent someone from arguing that they should not be included, because Customs and Excise could include them by name without giving an explanation or a reason. That point should concern the Committee and I should like to hear the Economic Secretary's views. 
 The burden of proof in evasion cases falls on the individual, who must prove that they have not been avoiding paying their liabilities—a point on which we have already touched. Clause 26 introduces civil penalties for a breach of certain rules and requirements in circumstances other than evasion such as negligence. Would it not be better if the Government had to prove that an individual is guilty of evasion? For example, an innocent trucker could make an administrative error through negligence or oversight and find himself automatically liable to civil penalties at the discretion of Customs and Excise. The 
 burden of proof and the right to redress particularly concern me, and I look forward to the Economic Secretary addressing those issues when he sums up.

John Healey: Civil penalties are being introduced to encourage businesses to comply with their legal obligations. Where businesses are suspected of evading duties, the law will provide Customs and Excise with an alternative to prosecution—the imposition of a civil evasion penalty.
 There will be two types of penalty. The evasion penalty established in clause 25, with which we have just dealt, will be used as an alternative to prosecution in less serious cases of evasion. It is not a substitute for prosecution, and businesses or individuals that evade or try to evade duties or taxes will continue to be penalised either through a civil evasion penalty or, where appropriate, criminal prosecution. 
 The other penalty, which is set out in clause 26, will deal with general non-compliance where evasion is not involved. It will be used in cases of failure to comply with legal requirements and obligations—for example, a business that makes persistent errors on import declarations. It will also be used to deal with the small number of businesses that fail to comply fully with legal requirements and obligations in seeking to gain a competitive advantage over other businesses; and to encourage those businesses that persistently make mistakes to improve their performance. It will not be used to punish occasional, minor errors. 
 The maximum penalty for a contravention not involving evasion through dishonesty will be £2,500.

John Baron: The Minister states that the power will not be used to punish minor indiscretions. Who will make that decision, how will it be made and does the Bill contain guidance, because ''minor errors'' is a subjective term?

John Healey: I used the phrase in an attempt to underline the fact that the process is proportionate to persistent non-compliance, and the penalties in clause 26 are similarly proportionate. I am not trying specifically to define what ''minor'' will mean in this instance.
 Initial contraventions—I hope that this will reassure the hon. Member for Eddisbury—will be dealt with by issuing a warning letter. Members of the Committee would regard that process as a sensible, proportionate first response from Customs and Excise, although I intend to review the policy when the regime has operated for about 18 months.

Michael Jack: I am grateful to the Economic Secretary for giving way and for his assurance that he will keep the matter under review. I seek an assurance from him that he will publish a commentary in his annual report on Customs and Excise on how the penalty regime is operating to allow everyone to gain an annual overview of how the regime operates, its effectiveness and any questions that have been raised.

John Healey: In monitoring and reviewing the regime, Customs and Excise and I, as the Minister
 responsible, will provide the degree of disclosure for which the right hon. Gentleman is looking. I am perfectly prepared to give an undertaking that an assessment of the operation of the regime in its first 18 months will be published. I cannot tell him for certain that the annual report will be the appropriate time or place to do so, but I hope that he accepts and appreciates the general commitment and principle.
 I shall explain how the scheme is likely to operate to reassure hon. Members. After the initial warning letter, similar contraventions will begin to attract penalties. The penalties will usually be stepped and will be imposed at a low level to begin with. Should the first penalty fail to deter or to encourage better compliance, the business concerned will attract further penalties if it does not improve its record. The penalties can rise to a maximum of £2,500.

Norman Lamb: The Economic Secretary may be about to deal with this point. He referred to the maximum fine of £2,500. In its submission, the Institute of Chartered Accountants in England and Wales raised this question: if there were a common breach in 20 invoices covering the import of a consignment of the same goods, all destined for different customers, would the fine be £2,500 or £50,000? Perhaps the hon. Gentleman would deal specifically with that question.

John Healey: Specifically, the maximum fine in such circumstances would be £2,500. In a situation such as that put to me by the hon. Member for Eddisbury, in which Customs discovers a series of identical contraventions—that is also the point of the hon. Member for North Norfolk—Customs will treat the contraventions as a single event and, if appropriate, issue a single penalty which may be up to the maximum of £2,500 as set out in the clause. I hope that that settles hon. Members' concerns.
 The hon. Member for Billericay asked about the burden of proof. It will be for Customs to prove that on the balance of probability, which is the standard of proof that we discussed earlier, a liability to a penalty exists. 
 On amendment No. 125, I say to the hon. Member for Eddisbury that by deleting clause 26(3) he would jeopardise the ability of Customs to ensure that the person who is responsible for the contravention is penalised. I hope that by briefly explaining the purpose of the clause I can set his mind and that of the hon. Member for Billericay at rest. Clause 26 provides for penalties for contraventions of relevant rules. In most cases, national and European Union Customs law specifies in the relevant rules the person who is responsible for compliance; for instance, the importer or the warehouse keeper. However, in some cases, the law is less specific and contravention may be committed by any person. Clause 26(1) provides the power to impose a penalty on a person of a prescribed description. Clause 26(3) ensures that, if appropriate, the description may include any person. 
 For the reassurance of members of the Committee, clause 26(3) does not and cannot extend liability for a penalty to anyone who is not responsible in law for meeting a relevant obligation or requirement. I hope 
 that with that explanation Opposition Members will withdraw the amendment. If they do not, I ask my hon. Friends to resist it.

Stephen O'Brien: I pay tribute to the Economic Secretary for having dealt with the clause and the issues raised by it with care. I found the argument that my hon. Friend the Member for Huntingdon presented in his interesting and proper probing amendment intriguing, but the Economic Secretary demonstrated that there is a difference in the interplay between subsections (1) and (3). I also welcomed the support and the arguments of my hon. Friend the Member for Billericay.
 The Economic Secretary mentioned a warning letter, a stepped approach to penalties and a maximum penalty of £2,500. In parenthesis, I wish to note that anyone who has ever been caught speeding in their car by two cameras in succession would welcome his approach to penalties. I have often wondered whether I will be guilty of such an offence, but I have not yet succumbed.

John Healey: Is the hon. Gentleman suggesting that Customs should take on responsibility for the operation of traffic Acts?

Stephen O'Brien: On the contrary. Like all things, it takes time to prove one's worth. In any event, I understand that the Attorney-General has overall supervision of the prosecution affairs of Customs and Excise from recent times.
 I listened carefully to the way that the Economic Secretary explained the interaction of subsections of clause 26. Therefore, in view of the undertaking that he gave my right hon. Friend the Member for Fylde that the matter would be kept under constant review, I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn. 
 The Chairman, being of the opinion that the principle of the clause and any matters arising thereon had been adequately discussed in the course of debate on the amendments proposed thereto, forthwith put the Question, pursuant to Standing Orders Nos. 68 and 89, That the clause stand part of the Bill. 
 Question agreed to. 
 Clause 26 ordered to stand part of the Bill. 
 Clause 27 ordered to stand part of the Bill.

Clause 28 - Exceptions from section 26

Question proposed, That the clause stand part of the Bill.

Stephen O'Brien: The clause enables Customs to switch from a company to a director a VAT liability arising from a VAT evasion, if it appears to it that the liability arose from the director's dishonesty. The Institute of Direct Taxation says that, although clauses 33 to 36 gave the VAT tribunal the right of appeal, it is for the director to prove that Customs is wrong, not for Customs to prove otherwise. Customs must prove that there was evasion by the company, but not that the director was personally dishonest. The institute asks why, as this appears to be a criminal penalty under
 human rights law, Customs should not also have to prove that the director has acted dishonestly.
 I have put on the record the representation that has been made to me. We have not chosen to encompass the argument in an amendment. I look forward to the Minister's response.

John Healey: As the hon. Gentleman has made clear, the clause provides for a civil evasion penalty to be levied against a director or other relevant officer of a body corporate liable for a penalty, when the conduct giving rise to the penalty is attributable to that individual's dishonesty. I should tell the hon. Gentleman and the Institute of Indirect Taxation that the proof rests with Customs, not with the director.
 Allowing penalties to be assessed against dishonest directors or officers of a company ensures that those who benefit personally from an evasion for which they are directly responsible can be targeted. The provision mirrors arrangements that are already applied successfully in the VAT civil evasion penalty regime. On that basis, I commend the clause to the Committee. 
 Question put and agreed to. 
 Clause 28 ordered to stand part of the Bill.

Clause 29 - Reduction of penalty under section 25 or 26

Question proposed, That the clause stand part of the Bill.

Stephen O'Brien: Again, a representation has been made to us to make sure that this matter is put on the record, so that there is no question of it not being properly considered as part of our scrutiny. The Institute of Chartered Accountants of England and Wales recognised that the clause is intended to replicate section 70(4) of the VAT Act 1994 in respect of clauses 25 and 26. It is seriously concerned that, where penalties are considered to be of a criminal level, subsection (3)(c) would deny taxpayers a defence that goes to the heart of the motive test.
 A penalty under the clause is relievable on the ground that the taxpayer had a reasonable excuse, but if the taxpayer is precluded from arguing that they acted in good faith, that sabotages any possible argument that they had a reasonable excuse. The denial of this defence, moreover, allows for a challenge on the ground of the infringement of human rights legislation and therefore weakens the clause. The ICAEW goes on to say that that comment would apply equally to any existing section 70 provisions that are applicable to penalties of a criminal level. 
 I raise the point on the same basis as on the previous clause.

John Healey: The clause permits mitigating circumstances to be taken into account so that a civil penalty can be reduced. At the same time, it sets out the circumstances in which a reduction cannot be considered. Mitigation of a penalty amount will be appropriate in many cases. For example, where a business or an individual actively assists Customs and Excise to establish the extent of the arrears, thereby saving officials time, that assistance will be recognised
 by a reduction in the amount of penalty assessed. As we draw comparisons to the VAT civil evasion regime that is already in place, it may be of interest to the Committee that the average penalty applied in cases of VAT civil evasion is currently just over 40 per cent. of the tax evaded. That figure shows the reduction in penalty that many taxpayers earn through co-operation with Customs and Excise investigations.
 The hon. Member for Eddisbury asked why a person who acts in good faith might be precluded from being taken into account by Customs or a tribunal in considering whether a penalty can be reduced under clause 29. I will try to clarify the situation in the following way. When a person is liable to a penalty under clause 25 for evasion through dishonesty, there can be no question that he acted in good faith. In contrast, there is a general recognition that taxpayers have acted in good faith where dishonesty is not an issue. That has been recognised in setting the maximum penalty in clause 26 at a figure well below the maximum provided in clause 25, and in the decision to step the non-evasion penalty. Allowing further mitigation for good faith would in effect give the taxpayer dual relief. Decisions about whether to reduce a penalty, and if so, by how much, will initially lie with Customs, but its decisions are appealable to the independent VAT duties tribunal. On that basis, I hope that the Committee will support the clause. 
 Question put and agreed to. 
 Clause 29 ordered to stand part of the Bill.

Clause 30 - Demands for penalties

Question proposed, That the clause stand part of the Bill.

John Healey: Briefly, and for the record, the clause sets out the procedures by which a demand notice for a penalty will be issued by Customs and Excise. The issue of such a notice is an appealable matter to the independent VAT and duties tribunal. The clause also provides that amounts demanded as penalties are recoverable as though they are Customs duties. That mirrors the arrangements adopted in other civil penalty regimes. I commend the clause to the Committee.

Stephen O'Brien: I just wish to say that that is noted and accepted.
 Question put and agreed to. 
 Clause 30 ordered to stand part of the Bill.

Clause 31 - Time limits for demands for penalties

Question proposed, That the clause stand part of the Bill.

Stephen O'Brien: The clause specifies the time limits for issuing civil penalty demand notices. Although the principle of having such a clause is not disputed in relation to the technical process of the Bill, there is a
 problem. The determination of the start date for calculating time limits for the raising of assessments or, as in the instant case, demand notices gives rise to considerable litigation and expense. It is our duty to seek to avoid that consequence flowing from statutory provisions as best we can. The method of calculating the start date for the time limits should be defined more closely to create some certainty for taxpayers. That is a principle that we seek to push forward throughout the consideration of the Bill.
 The problem arises in a number of existing areas of tax legislation, and it is disappointing that in introducing a new civil penalty regime, no attempt has been made by the Treasury or Customs and Excise to address the issue. Continued reliance on case law is unattractive as it discriminates against small businesses that may not have ready access to the case law in question. I am well aware that many Committee members are concerned that small businesses do not find themselves with an added cost burden or discriminated against. There are a number of potential solutions to the problem that could be based on the principles surrounding case law, or perhaps by linking the start dates to the start of the financial year, thus requiring Customs to show only that the relevant conduct had been conducted at some stage during the financial year. 
 The aim of any principles adopted should be to reduce the need to argue about the specific dates on which conduct ceased, although consultation would be required to ensure a fair balance on the time given to Customs to pursue such matters. I have deliberately not proposed an amendment on the basis that the matter would benefit enormously from the Economic Secretary and the Government giving it further consideration, and taking consultation with business and advisors further. We look forward to what he has to say, but if it does not satisfy us the matter may resurface on Report.

Michael Jack: When the Minister responds to my hon. Friend's observations, I should be grateful if he would expand on the reason for choosing a time limit of 20 years in clause 31(1)(a). It states that a demand notice may not be given
''in the case of a penalty under section 25, more than 20 years after the conduct giving rise to the liability to the penalty ceased.''
 That is a long time, and I should like to know why that period was selected and on what basis it was determined to be the right period. I am aware that, over time, application of the Statute of Limitations to Customs and Excise matters has changed, particularly concerning repayments. Instead of going back six years, Customs and Excise has an arrangement to go back three years for repayment of certain moneys. That is reflected, oddly, in subsection (1)(b). I am always interested to know why certain periods are chosen and the thinking behind them. I should be grateful for a full explanation from the Minister.

John Healey: The clause sets out time limits for the issue of demand notices. The provisions are designed to protect the interests of those incurring penalties by ensuring that the threat of the penalty cannot hang over them indefinitely.
 In response to the right hon. Member for Fylde, the time limits in the clause simply mirror those applying to the VAT civil penalties regime, which already exists and operates effectively. 
 In response to the hon. Member for Eddisbury, if there are problems with the time limits, I would expect them to be exposed during the operation of the new regime and to be identified in the review which we intend to undertake after about 18 months of its operation.

Michael Jack: May I ask the Minister how that would operate in the case of a company that might, for example, be fraudulently avoiding its obligations under VAT legislation which then, perhaps after three or four years, goes into liquidation? It would automatically go out of business and cease to be a legal entity. The 20-year timescale could give rise to the possibility that people might contrive to avoid their obligations through such artificial constructs. If so, what will happen?

John Healey: I am conscious of the time and, if the right hon. Gentleman will allow me to, I will consider the matter further and write to him.
 Question put and agreed to. 
 Clause 31 ordered to stand part of the Bill. 
 Clause 32 ordered to stand part of the Bill.

Clause 33 - Right to review of certain decisions

Question proposed, That the clause stand part of the Bill.

John Healey: The clause requires the commissioners to review any decision that there has been a breach of a legal obligation when the relevant business or individual so requests. That is an important provision.
 For contraventions not involving evasion, the commissioners may decide not to assess a penalty, but may inform the business or individual concerned that future performance will be formally monitored for a specified period. The clause gives the business or individual the right to challenge the commissioners' contention that a contravention has occurred and, therefore, to challenge the decision formally to monitor performance. The right to require reconsideration by the commissioners also applies to any demand notice issued in respect of any liability to penalties under clauses 25 and 26.

Stephen O'Brien: I should put on the record that we are content with the Minister's explanation.
 Question put and agreed to. 
 Clause 33 ordered to stand part of the Bill.

Nicholas Winterton: I remind the Committee that I understand through the usual channels that it has been agreed that we should sit until around 7.30 pm. I suggest that I call a tea break at or about 5 pm, when a Division will take place. I hope that that is convenient. The Chair always seeks to be as helpful to the Committee as possible.
 It being twenty-five minutes past Eleven o'clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order. 
 Adjourned till this day at half-past Two o'clock.